The Globe and Mail, Report on Business
Published March 7, 2009

The news media have been remarkably quiet about the Berkshire Hathaway Inc. newsletter this year. And yet, as we go through this historic time, we need its calm, common sense and optimism more than ever.

Warren Buffett's annual letter to shareholders, released last week, is like an old friend. Every year it has the same format and font. It is reasoned and understandable. And there is always some humour and plenty of optimism.

This year, Mr. Buffett had valuable perspectives on private equity (it's more about reducing equity), psychology ("beware of investment activity that produces applause"), mortgage lending (it can be done right), risk (underpriced) and safety (U.S. Treasuries are a potential bubble).

Beyond the usual insights, however, there are other things that make Mr. Buffett, Berkshire Hathaway and the letter unique.

The first is the calm. Mr. Buffett opens with some comments on the current crisis, but he keeps it brief. There is no hysteria or hyperbole, even though his company had one of its worst years on record. The letter provides a thorough and dispassionate review of what and how the company is doing, including the hits (steady earnings from MidAmerican Energy Holdings) and the misses (buying ConocoPhillips at the oil peak).

The second is Mr. Buffett's language, which is unique for the investment industry. There are no references to "sector weightings" or being "over" or "underweighted." Words such as "management guidance" or "earnings expectations" never creep into the commentary. It is just unrelenting common sense.

The letter is a sharp contrast to how the investment industry communicates with clients. The way we discuss (or rather don't discuss) strategies, fees, risk and alignment of interests is inadequate and won't cut it in the years ahead. We all need to take a page from the Berkshire annual report.

While Mr. Buffett's wealth and celebrity give him every opportunity to drift away from his disciplines and principles, he never does. He is looking to take risks when the odds are stacked in his favour. While others run for cover, he just goes about his business buying companies and looking for mispriced securities.

In 2008, Berkshire entered a new business - it started insuring municipal bonds when the existing players ran into trouble - and increased its exposure to some much-maligned derivative contracts (including credit default swaps).

Some people will be surprised to know that Mr. Buffett is an active and willing investor in derivatives. In this regard, he appears to be straying from his philosophy, but he's not. As always, he keeps it simple and he knows the territory well.

Indeed, he spent five years unwinding the messy derivatives book at insurer General Re Corp. after he bought the company in 1998 (there were 23,218 contracts and 884 counterparties to work through).

With respect to his current holdings, he said: "I both initiated these [derivative] positions and monitor them, a set of responsibilities consistent with my belief that the CEO of any large financial organization must be the chief risk officer as well. If we lose money on our derivatives, it will be my fault."

As I go through the letter, I am reminded that Berkshire Hathaway is one of the great hedge funds of all time. I'm not referring to the high fees and lack of transparency that hedge funds are known for, but rather the open and unconstrained way in which Mr. Buffett, Charlie Munger and their senior managers invest.

With no client or consultant expectations to worry about, they will look anywhere for undervalued assets and when they find them, they are often the first to get there. While Mr. Buffett clearly states his preference for owning private businesses - "We like buying underpriced securities, but we like buying fairly-priced operating businesses even more" - he's also willing to invest (short or long) in public companies, commodities, currencies, convertibles and unusual insurance contracts. Depending on the situation, he'll be a passive outsider or an involved insider.

It's reassuring that the 2008 version reads like all the others. Mr. Buffett continues to invest where the potential reward is disproportionate to the risk he is taking. The only thing that's different this time is he's more optimistic about the opportunities available to him.